In order to understand the overwhelming impact of health care expenses in retirement, it makes sense to analyze health care expenses in relation to a basic retirement household budget.
Let’s revisit John and Mary, a healthy 57-year old couple who plan to retire at 67. Even though they will be fully insured (Medicare A,B,D and Medicare Supplement), they will need a total of $322,699 at the point of retirement, compounded at 5% per year, to cover their total out-of-pocket health care expenses of approximately $587,000 during retirement.
John and Mary have decided that while in retirement they will maintain living expenses of less than $30,000 a year. A key point to consider is that statistically over 50% of retirees spend more money in retirement than they did while in the workforce. But, John and Mary are confident that they can live comfortably on a $29,400 budget.
Here is a breakdown of their expected monthly retirement budget:
$800 on Mortgage and Taxes
$200 on Auto
$200 on Insurance Premiums
$500 on Food
$500 on Food and Utilities
$250 on Other Expenses
Total Monthly Expenses are $2,450
Total Annual Expenses are $29,400
Let’s look at the financial impact of this frugal budget in retirement. In year one of retirement, that $29,400 annual household budget will actually be $40,677 based on a 3.2% inflation rate. In addition, they will be spending $9,570 on their medical expenses for a total expected budget of $50,247. That is over a 70% increase in what John and Mary planned to spend in their first year of retirement.
By the time they are both 75 years old, the household budget will grow to $52,741 and health care expenses will be $21,480 for a total budget of $74,221. And remember, John and Mary have not taken a vacation and I did not account for cable TV or taxes!
The moral of the story is that if you can save more, do it today. If you are within 15 years of retirement, meet with a financial advisor, develop a plan and work it. Planning today will pay off in the home stretch.
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